Lease or Buy: Crunching Car Numbers
By: Staff

By Jeff Brown
Maybe you’re tempted by the big incentives out there. Maybe your old ride is on its last legs. Whatever the motivation is, if you’re thinking about buying a new car, you’ve probably considered this question: should you buy or lease your next vehicle?

Financial calculators are among the most useful offerings on the Internet, and sbup’s buy vs. lease calculator is a tremendous tool for car shoppers. But calculators are not mind readers. So before you decide whether to buy your next vehicle or lease it, be sure the calculator’s assumptions match your own.

Most importantly: figure out how long you’re really likely to keep a car if you buy instead of lease. In order to make apples-to-apples comparisons, buy-vs.-lease calculators assume the car is sold at the end of the period analyzed – typically 24 or 36 months. In fact, people who buy often hold on to their cars much longer, making purchase the cheaper option.

In the showroom, leasing often looks more attractive, since monthly lease payments are frequently lower than loan payments for the same vehicle. A good calculator gives a clearer picture by considering factors like the interest rates on the purchase and lease, the down payments and the rate at which the vehicle will lose value over the years.

Look, for example, at the figures displayed when you use’s buy vs. lease calculator.

The lease cost on a $20,000 vehicle is figured by adding up the lease payments for 24 months, tacking on the up-front costs like down payment and fees, and then adding the “lost interest,” which is what you could earn if the upfront costs were invested at 8 percent instead of being used to lease the car.

The cost of owning is a little more complicated. It tallies the up-front costs and payments for 24 months and adds the lost interest that could be earned if the upfront fees and other costs were invested instead.

Next, it estimates the market value of the vehicle after two years. That figure is subtracted from the outstanding loan balance – the amount you’d still owe after two years on your 60-month auto loan. Since the balance would be bigger than the vehicle’s market value, you would have to add $400 to the sale proceeds to pay off the loan.

The calculator concludes that, in this case, buying is slightly cheaper than leasing.

But there are many “ifs.” You don’t know just what the car will fetch when you go to sell it in two years. Nor can you be sure of the figure you use for investment return. You should play with a range of assumptions.

Most important is that question of whether, if you bought the vehicle, you’d really sell it after two years.

Suppose you kept it for 10 years. You would finish making car payments after five years and be free of payments for the next five. If you lease a succession of cars for 10 years, you’ll always have payments.

After 10 years, the lease payments would total $50,880 – or more, since future leases will probably go up with inflation. Total monthly payments on a purchase would be $24,840. Of course, maintenance and repairs would surely be higher on the purchased car, but it’s hard to imagine they’d come to $26,000.

On a purely financial basis, buying makes more sense if you are willing to keep a car for many years. Leasing makes sense if you are willing to pay a price to drive cars that are always relatively new and on warranty.

Calculators can help you understand the numbers, but only you can put a value on the peace of mind that comes from leasing.

When you explore buying, be sure to shop for the best rates.  sbup's auto loan section lets you enter your zip code and compare rates from both big lenders like Bank of America (Stock Quote: BAC) as well as regional credit unions.

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